Prospect Theory

A loss hurts more than an equal gain feels good. We take more risks to avoid the pain of loss. The more we gain, however, the fewer risks we continue to take and the less we feel with each gain. There are three cognitive features at the heart of this theory:

• Evaluation is relative to a neutral reference point, sometimes referred to as an "adaption level". Outcomes above a reference point are seen as gains, and below seen as losses. (see: Anchoring)
• Diminishing sensitivity applies to both sensory dimensions and evaluations of changes to wealth (logarithmic) (see: Hedonic Adaptation)
• Losses loom larger than corresponding gains (see: Loss Aversion)

#behavior

Related studies:

• Kahneman & Tversky (1979). Prospect Theory: An analysis of decision under risk. Econometrica, Vol. 47, No. 2 263, pp. 263-292

Examples:

• Bottom Dollar Effect
• Cashless Effect
• Inaction Inertia
• Loss Aversion
• Negativity Bias
• Ownership Bias, Endowment Effect
• Pessimism Bias
• Regret Aversion
• Scarcity
• Sunk Cost Bias
• Time Scarcity